The Oklahoma Senate has suspended a tax incentive for the oil industry that’s likely to see a lot of small producers go under.
Oklahoma is facing a budget shortfall of U.S. $1.3 billion this year, not least because of a special tax break for the oil industry. The incentive, in the form of tax rebates for oil wells that are economically at risk, was introduced in 2005 to provide small, mom-and-pop type oil producers with a means of survival in times of low prices. Unfortunately, the bill for the state has swelled so much that it can no longer afford to keep this up.
The at-risk well rebate amounts to six-sevenths of the 7 percent tax that oil producers pay on their wells. But not all wells in Oklahoma are taxed at 7 percent. The tax applies to old vertical wells (around half of all operating wells in the state) and will apply to horizontal wells in a couple of years, when the tax rate for horizontals will automatically jump from 1-2 percent to 7 percent. Related: Oil Price Spike Is Not As Far Away As Many Think
In 2013, the overall rebates for the operators of at-risk oil wells totaled $11 million. The sum for 2015, which is to be paid this year, is estimated at $133 million. Next year, estimates of the Oklahoma Tax Commission show that the state would have had to pay $158 million in rebates. But this is not going to happen.
The state senate just passed a bill that scraps the tax incentive, despite calls from the local oil industry association, which is seeking a cap on the amount instead. The Oklahoma Independent Petroleum Association argued that limiting the amount of rebates to $25 million would be a sensible compromise that both the state budget and the industry will benefit from. However, apparently the senate did not share that opinion. Related:Why Jim Chanos is Shorting the Oil Majors
One of the authors of the bill, Brian Bingman, said, “That's our main responsibility, funding government properly. So let’s make sure everyone shares in the pain that we're going through this year,” adding that his next target is the wind industry.
The move will most likely force a lot of small producers to idle most or all of their wells: at current crude oil price levels, these wells will be not just at risk, they will be clearly unprofitable. Although oil is a vital industry for Oklahoma, in this price environment, supporting it has turned into an unbearable burden.
By Irina Slav for Oilprice.com
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